Here we take a look at how you can use chart patterns to give you an understanding of the buying and selling that’s taking place in the market. Chart patterns can help you analyse the market and forecast your trading strategy.
So let’s take a look at the different types of chart patterns.
1. Triangular Patterns
Triangular patterns form the shape of a triangle where two trend lines converge. A triangular pattern can be symmetrical (flat), descending or ascending.
A symmetrical triangle is what we call a continuation pattern- it signals a phase of consolidation in a trend, followed by a period of continuation of a previous trend.
The triangle is created where a descending resistance trend line and an ascending support trend line meet. The point at which they meet is called the apex point, and from there, the two trendlines will have a similar slope (hence the name symmetrical).
In a symmetrical triangle, the asset price will tend to bounce between the trendlines aiming for the apex, and eventually break out in the direction of the previous trend, as you can see in the chart below.
If the previous trend was downwards, you would look for a break below the ascending support line (and vice versa), although bear in mind that this doesn’t always lead to a continuation of the previous trend.
If the break is through the opposite direction of the previous trend, this could signal the formation of a new trend.
The pattern will finish when the price breaks out from the triangle, so keep an eye out for an increase in volume.
An ascending triangle is a bullish pattern. It shows you that the price is headed higher upon completion. This pattern is also created by two trend lines, but in this case, there will be a flat line at a point of resistance and an ascending trend line acting as price support.
The price will fluctuate between these trend lines until it breaks out above the flat line, and an upward trend usually follows.
You need to keep an eye on the ascending support line, as will show you when sellers are starting to leave the market. This is important because once sellers are out, the buyers are likely to take the price above the resistance point and continue an upward trend. This is shown in the chart below.
A descending triangle is the exact opposite of an ascending triangle and it’s a bearish pattern. It shows you that the price will fall upon completion of the pattern. It’s made up of a flat support line and a downward sloping resistance line.
This pattern is a continuation pattern, and it tends to be preceded by a downward trend line. As you can see in the graph below, it starts out with a decrease to a low point which sends the price higher. It will then test the descending trend line aiming for the apex until the price is unable to support the level- and this results in a downward trend.
2. Wedge Patterns
The next type of chart pattern I’m going to take you through are wedge patterns. These tend to signal a reversal in trend, and they look similar to a symmetrical triangle, where the asset price is contained within a band, with a level of support and resistance.
Wedge patterns tend to be a longer-term pattern than their triangular counterparts, and last for many month at a time. They are made up of converging trendlines which slant in either an upwards or downwards direction.
There are two types of wedges, rising and falling. Let’s take a look at them.
A falling wedge pattern gives a bullish pattern signal. It shows the price break upwards through the wedge and resistance level into an uptrend.
As you can see from the chart, it’s similar to a triangular pattern in that the price movement bounces between the two trendlines.
The difference is that in a falling wedge, you’ll notice a larger gradient in the upper trend line. The lower trend line will be flatter, and this signals that selling pressure is easing. This means sellers will have trouble pushing the price down further.
A buy signal will be created when the price breaks through the upper resistance line. Due to the long term nature of this pattern, though, it’s wise to wait and make sure the price has successive closes above the resistance line.
This pattern is the opposite of a falling wedge and gives a bearish pattern signal. It will show the price break downwards through the wedge and support level into a downtrend.
As you’ll see from the chart, again it’s similar to triangular patterns because the price movement bounces between the two trend lines.
In a rising wedge, the gradient of the lower trend line will be greater and the upper trend line flatter. This shows you that momentum is easing; so buyers have trouble pushing the price up further when the asset is under pressure.
A sell signal will be developed when the price breaks through the lower support line. This shows you that sellers are starting to gain momentum. Again, though, due to the long term nature of wedge patterns, you’re better off making sure the price has successive closes below the support line.
3. Pennant Patterns
This is the last kind of chart pattern, and it forms where there’s a large price movement followed by a sideways movement, which creates a pennant. You can tell the pattern is complete when it breaks out in the same direction of the sharp price movement.
You will usually see a similarly sharp move in the same direction as the previous move: this is because after a significant price movement, it takes time for the market to consolidate before resuming its trend.
As you can see in the chart, a pennant looks a lot like a symmetrical triangle, made up of support and resistance trendlines which converge to an apex. However, the direction of a pennant in usually quite flat.
Also, in a pennant pattern, there is no need to test the support and resistance lines several times (as a triangular pattern does). This is because this style of pattern usually has quite a short time frame due to the large market movement.
Keep your eye on the volume: it’s a key aspect to look for on breakouts and will confirm a good signal.